The ecstasy and the agony of Canadian pensions

Canadian pensions and pension systems get widely varying report cards. For example, in the report OECD Pensions at a Glance, the authors rate Canadian pension systems (including OAS, OAP, and CPP) highly by some criteria, but poorly by others. Canadian systems work well for the disadvantaged, guaranteeing nearly 80 per cent or more of pre-retirement income for those earning half or less of the national average income. By this measure, Canada is in the top eight of the 34 OECD countries. But for Canadians making the national average wage or above, the pension replacement rate in Canada (comparing guaranteed pension income to pre-retirement income) is only about 40 per cent, compared to the OECD average of 59 per cent. This places average Canadians in the bottom 10 OECD countries by this measure. Depending on which group is considered, the flavour of reports on Canadian pensions varies from "pension crisis" to "what crisis?" Who to believe?

Canada is even more extreme by some measures. Only about 5 per cent of elderly Canadians live in poverty, as noted by the Conference Board and International Labour Organization. By this measure, Canada is near best in the world -- only Holland and France do better. A smaller fraction of Canada's elderly live in poverty compared to Canada's children or workers.

On the other hand, a smaller fraction of Canadian workers get a workplace pension plan compared to the other G7 countries. Only about 35 per cent of Canadian workers have an employer-sponsored pension plan; and if public service employees and unionized employees are excluded, across the rest of the workforce (the majority), less than 20 per cent have a workplace pension plan, and that number is falling. Canada is at the bottom of the G7 countries by this measure. We are generally following an established trend in some comparable countries, away from defined-benefit pension plans -- but with a difference. In the U.S. and U.K., the numbers of employers offering such plans are also dropping. Employers dropping defined-benefit pension plans in those countries are generally shifting to defined-contribution plans, which are safer for employers but less secure for employees. But this is still better than in Canada, where the alternative to an employer defined-benefit plan is, in most cases, no pension plan.

Canadians get complimented internationally for their levels of personal savings for retirement -- along with the Japanese, we are some of the most saving-inclined people on earth. The OECD report noted above comments: "The proportion of retirement incomes coming from private pensions and other financial assets in Canada is one of the highest among OECD countries." But on closer look, this is a mixed blessing: both a fading habit in Canada, and an unfortunate necessity for too many Canadians, because more desirable and efficient employer-based pension plans are unavailable to them.

Canadians have above-average access to enhanced private savings options through RRSPs. But as in similar plans in Australia, the market in Canada is structured so that too many uninformed buyers have too many choices, resulting in a fragmented market with too many players -- leading to excessive fees for Canadian plans. Others (e.g., the U.S. with their 401 plans) have structured their plans so they achieve more vendor consolidation, resulting in better investment results, with lower fees.

Canada has achieved some of the highest levels of national sustainability of pension plans, while providing some of the least security to individual pensioners. In many major countries like Germany, Italy, France or Brazil, some of today's pension payments come from contributions by other current workers -- a "PAYGO" system considered a drain on the national economy, and less sustainable as the ratio of pensioners to workers rises rapidly in the next 20 years. But thanks to good pension plan rules in Canada, almost all pension income comes from past contributions made by the pensioners (or their employers). Along with good Canadian regulation of pension funds management, the structure of pension plans in Canada is regarded as one of the most secure, sustainable and beneficial, across the OECD countries (see here, for example). On the other hand, the protection of individual plans in Canada is near the weakest. If a pensioner's former employer/pension-sponsor fails, typically their pension is severely reduced, a problem faced by many pensioners who worked for formerly great employers in Canada. The other G7 countries all have some explicit or implicit form of national insurance scheme against this form of pension fund collapse.

When will Canada catch on and correct this injustice? There are at least five good solutions available. Most OECD countries except Canada have adopted one or more. The first three were strongly recommended by the Ontario Expert Commission on Pensions in 2008. First, stop the windup of pension plans into annuities when a sponsoring employer fails. The annuity-based windup is the easiest for governments to administer, but causes excessive reduction in pension payouts. Second, create an up-to-date pension insurance program for Canadian pension plans. This is an approach taken explicitly by the U.S., U.K., Germany and Japan. Third and longer-term, restructure pension plan laws so multi-company plans become the norm, reducing or eliminating the risk to pension plans because of a single company's failure, and enabling better investing through larger scale. A small number of such plans exist in Canada, but they are more common in the U.S. and some other countries. A fourth option is simply to raise the priority of pension funds as a company creditor in bankruptcy -- probably the easiest and quickest option for our national government to implement, and already in place in numerous OECD countries. A fifth potential option is an expansion of CPP (or a similar government-sponsored alternative) to cover more of Canadians' pension needs -- more or less the approach of France, Italy, Brazil and others.

When will Canada catch up with the world by implementing one or more of these options to bring the pension security of retired Canadians up to date? This is an early and necessary step to restore more viable and universal workplace pensions in Canada.

Retiree Matters is a monthly column written by members of the Congress of Union Retirees of Canada (CURC) that explores issues relevant to retirees, senior citizens, their families and their communities. CURC acts as an advocacy organization to ensure that the concerns of union retirees and senior citizens are heard throughout Canada.